Bradford & Bingley (B&B) angrily denied reports yesterday that it was planning an emergency rights issue amid fears that rumours about the health of its balance sheet would send its share price plunging today.

In a statement in response to Sunday newspaper stories, Britain's biggest buy-to-let lender said: “Bradford & Bingley has a strong capital base, above its regulatory requirements, and as a result of the board's conservative approach, has funded its business activities through 2008 and into 2009.”

The bank reportedly had asked Citigroup, its corporate broker, to assist with a capital raising. Sources said that, like most banks, B&B had looked at all funding options in the credit crunch but that it had no need for a quick cash injection.

Chris Willford, B&B's finance director, told a conference this month that the bank had not yet drawn on a £2 billion funding facility of three to five-year cash supplied by a number of banks. It also raised £2.5 billion in the wholesale market last September and October and funds more than 50 per cent of its lending with retail deposits.

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However, sources expect all bank shares to be hit today as a result of speculation about B&B's funding. “I wouldn't be surprised if everyone goes down on the back of this,” one banker said. B&B stock closed at 167p on Friday, having fallen more than 35 per cent in 2008.

Banks are terrified of a repeat of the hit taken by HBOS last month, when unfounded rumours that Britain's biggest mortgage lender had asked the Bank of England for an emergency loan wiped 71 per cent off HBOS's share price.

Analysts said that a number of British banks eventually would be forced to raise capital, because they are the most weakly capitalised in Europe. Robert Law, a UK banks analyst at Lehman Brothers, said that once one British bank announced a rights issue, others would be under pressure to follow suit. “I do think they [the banks] will look at shedding assets ahead of raising equity,” he said, “but the amounts the UK banks can raise through asset sales are relatively limited. It would be incremental to their balance sheets rather than transformational.”

Mr Law said that the funding models of B&B, Alliance & Leicester and HBOS were the most vulnerable, while Royal Bank of Scotland (RBS) and Barclays had the most capital leverage. “We believe there is a high risk of capital raisings from the large UK banks, particularly at RBS, followed by Barclays and HBOS,” he said.

In a note last week, Graham Secker, a Morgan Stanley analyst, said that the rising cost and declining availability of debt would lead to a big jump in rights issues. There is now only 100 basis points or so between the cost of debt and equity and financial companies are the most likely to raise capital by re-equitising, Mr Secker said.

Bankers said that bank bosses were particularly sensitive about the possibility of rights issues because they feared losing their jobs. “If you did a straw poll of CFOs, 99 per cent of them would vote for a rights issue to shore up their balance sheets and take the pressure off, like Lehman did, but their big problem is to get it through their CEO because he knows a rights issue probably comes with a P45,” a senior investment banker said.

“They need to do it because they've got no capital to grow the business and if you have capital there are some very good margins to be had. The question is whether you can spin a rights issue as growth capital, rather than just filling a big hole in your balance sheet.”

Another banker said that investors were already pricing recapitalisation into the bank stocks. “People are expecting rights issues and figure that they'd rather buy when that happens instead of now,” he said.

At present bank customers are paying their debts. The TDX Group Debt Index, which measures the macro conditions in which the banks collect their debts, found that factors such as typical household debt, insolvencies and unemployment fell in the first quarter of 2008. Mark Onyett, chief executive of TDX, said: “There's been a lot of noise about the credit crunch, but there's not a UK issue with consumer repayment yet.”

Analysts predict rising impairments over the next two years on unsecured lending, while commercial real estate lending will also come under pressure. Goldman Sachs analysts forecast that increased bad debts could hit banks' earnings by as much as 30 per cent and shares have further to fall.

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